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Principles of the Stock Market

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Have You Seen This?

Have You Seen This?



Last Monday I presented the bull’s three pronged case, that:  (1) the credit crisis is past it’s worst stages, (2) that we can skirt a recession or just experience a mild one and (3) that we have good value in stocks today.  I offered the bull’s view up for balance, to see both sides to a story but I have to admit I don’t fully believe in it.  Sure no one can predict the future therefore the bull’s argument may turn out to be correct but after trying to look at both sides fairly, I still wouldn’t doubt that the credit crisis lingers, that we do have an US recession which spreads out globally and that stocks thus really don’t offer good value here, not with the economy getting worse, not better, which is still my conclusion.


Thus today, for today’s Big Picture perspective, let me highlight a few key points made in Peter Schiff’s 2007 book, Crash Proof.  First, Mr. Schiff (who gets lots of face time on CNBC anytime they want a bear on) says America is headed in the wrong direction morphing from an industrial economy over to a service economy.  He says we need to continue to produce goods, one key way to produce wealth.  Schwartz:  Sort of a shocker to me as I haven’t read many economists taking this position.  But it makes good common sense, right?  Manufacturing is what got America this wealthy in the first place.  Today’s service economy – flipping hamburgers, working in Macy’s, processing lawsuits, etc. – doesn’t seem like it’s producing any wealth.   Second, Mr. Schiff has a big problem with measuring how much Americans spend as equal to economic growth.  Schwartz:  Again, common sense agrees with Mr. Schiff.  Spending doesn’t produce wealth, just the opposite, it uses up what wealth we’ve built up.  Third, people have to live within their means, why shouldn’t countries like America be bound by the same rules?  Schwartz:  As a country, we’ve gotten around balancing our budget because of the Bretton Woods Conference & agreement in 1944 which established the US dollar as the world’s exchange currency.  But nothing lasts forever and the trend today is away from the dollar.  Fourth, that the US government and our Federal Reserve has lost its way.  The Fed was set up in 1913, after the Bank Panic of 1907, to provide an elastic money supply, expanding during economic expansions and shrinking during economic contractions.  Schwartz:  But somehow the money supply now just keeps expanding through good times and bad.  Fifth, the US government keeps pumping up inflation by its constant increase in the money supply but keeps concealing inflation’s rise through the use of distorted economic data which they change whenever it serves their purposes.  Schwartz:  We all know that kicking out food and energy is a big ruse.  That inflation today indeed is a lot higher than reported.  Sixth, recessions are normal occurrences and serve an important purpose.  Sure, economic fallbacks are no fun but they do clean out the imbalances built and fostered during previous economic expansions.  Schwartz:  Today, politicians go out of their way to attempt to avoid recessions.  You know why, because of their own self interests.


Schwartz View:  I’m only halfway through Mr. Schiff’s book but one key point I’m unearthing in chapter after chapter is his application of pure common sense when it comes to economics.  Liars figure is an old saying and maybe what this generation of investors has lost is plain old common sense, sort of disguised by government figuring and refiguring in their data reporting.  And of course, today we now have constant, 24-hour media coverage of financial markets which obviously is going to always highlight Pollyanna bulls like Larry Kudlow.  Thus we have to fight through this constant bullish spin which can be incredibly tough to do.  After spin after spin takes over any argument, eventually we’re all lost at sea about what the truth is.  Mr. Schiff tries to cut through this maze by bringing common sense back to the equation.  Thanks Peter!  (You can get his book on  I recommend it.)


Posted 05-28-2008 10:03 AM by Richard Schwartz
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